What Explains Performance Persistence of Corporate Bond Mutual Funds?

by Xu, Dan.

Abstract (Summary)

This paper examines the performance of corporate bond mutual funds during the
period from 1990 to 2003. We find strong evidence of persistence in risk-adjusted
performance. The reason behind the persistent performance varies across fund types. For
high-quality bond funds, the persistence is driven by time-varying factor loadings, where
fund managers trade dynamically on the economic information, such as the term structure
and macroeconomic factors. However, the persistence of high-yield bond funds cannot be
explained by the fee structure, momentum, callability, non-synchronous trading or timevarying
factor loadings. Further examination on the fund flows suggests that the
existence of performance persistence is due to the fact that fund flows are not sensitive to
the risk-adjusted fund performance, which is consistent with the theory suggested by
Berk and Green (2004). Our results have further implications for corporate bond fund
selection by investors.
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